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Informist, Tuesday, Jul. 8, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended slightly higher Tuesday on offshore flows tracking a rise in US Treasury yields, dealers said. According to dealers, there were also fears of the Reserve Bank of India announcing a variable rate reverse repo auction after market hours.

The one-year swap rate ended at 5.52%, slightly up from 5.51% Monday. The five-year swap rate ended at 5.71%, higher than 5.68% Monday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 164.95 billion, lower than INR 204.40 billion Monday.

Offshore traders likely paid fixed rate contracts tracking a rise in US yields, dealers said. The yield on the 10-year benchmark US Treasury note was 4.42% at 1700 IST, up from 4.39% at 0900 IST and 4.36% at 1700 IST Monday. US yields rose as investors mulled over the likely impact of President Donald Trump's latest imposition of new tariffs on 14 countries starting Aug. 1.

US yields also rose as traders sold Treasuries to make room for a fresh supply of bonds this week, media reports said. Domestic traders fear that the 10-year US yield could touch the key 4.50% level, after rising above the technical level of 4.37%, dealers said. However, domestic traders don't expect the yield to sustain above 4.50%, they said.

The five-year swap rate neared the key technical level of 5.72%, the upper end of the recent trading range, dealers said. Some onshore traders paid fixed rate contracts across the swap rate curve with the fear that the central bank would announce a VRRR after market hours. This auction would be in addition to a rollover of INR 1.00 trillion from last Friday, since surplus liquidity in the banking system has been above INR 3.00 trillion. The RBI Monday net absorbed INR 3.44 trillion from the banking system, lower than INR 4.09 trillion Sunday.

"It's just a matter of time now when the VRRR comes," a dealer at a private-sector bank said. "Market has already priced in another (INR) 1.00 trillion auction. We already know (INR) 1.00 trillion is going to be rolled over, but if another (INR) 1.00 trillion comes, liquidity will still be in surplus and (overnight borrowing) rates will be unchanged, so market has priced in the VRRR."

Traders are closely tracking updates on a potential US-India trade deal, after Trump's "tariff letters" to 14 trade partners late Monday. Traders said the tariff issue was likely to drag on for a few months, and that a US-India trade deal was welcome, but would likely take time.

"The (deal on) agriculture (trade) will remain a problem, because India will not back down on that, (because) if it does it'll bring up a lot of political issues domestically," a dealer at another private-sector bank said. "It's now up to the US to agree to it." 

OUTLOOK
Wednesday, swap rates are likely to take cues from the overnight movement in US Treasury yields. Traders fear, from a technical perspective, that the 10-year US yield could rise to 4.50% after remaining above the 4.20-4.30% range. Traders also await the minutes of the US Federal Open Market Committee's June meeting due after market hours Wednesday.

Swap traders will also track any developments on US-India trade talks and trade talks between the US and its other trade partners in general, dealers said. The impact of a US-India trade deal, or the lack of one, will be seen on swaps through the movement of the rupee against the dollar, dealers said.

On the domestic front, traders will watch for announcements of further VRRR auctions by the RBI. Traders are closely tracking overnight borrowing rates. The overnight Mumbai Interbank Offer Rate fixing will also lend cues after the initial trading hours.

Swap rates may also track the movement of gilt yields. The one-year swap rate is seen in the range of 5.46-5.60% Wednesday. The five-year contract is seen at 5.68-5.78%.

End

Edited by Nishant Maher

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